Too much "optimism" explains Alberta's expanded deficit

Back in the mid-1990s, British Columbia’s New Democratic government published a pre-election budget that forecast a balanced ledger for the then-ending fiscal year. The Glen Clark government quickly dropped the writ and narrowly won re-election.

But soon after the election, the government revised its forecast. A deficit of almost $400-million was predicted, about what some private forecasters predicted back when the original budget was released.

Even worse for the government, freedom of information requests made by the media to the provincial Finance ministry revealed that bureaucrats had been pressured to inject "optimism" into the original budget.

One document revealed how even the finance minister informed the premier early in the budget process that revenue forecasts were "considerably above her comfort range".

Still, pre-election, the premier’s political staff had insisted more "revenue optimism" was needed in everything from corporate profits to the price of softwood lumber. They pressured finance ministry officials to such an end.

One high-ranking civil servant even signed an internal document that showed how she emphatically disagreed with the overly optimistic revenue projections forced on her by the premier’s political staff. (It was those revenue projections that allowed for the balanced budget claim.)

Such post-election revelations led the 1996 budget to be known as the "fudge-it" budget, and the NDP’s popularity fell to historic lows.

I note the bit of British Columbia budgetary history because back in February, the Alberta government forecast an $886 million deficit for the current year and a balanced budget next year.

Problematically, the government’s revenue assumptions were already on thin ice back at budget time and are again relevant as the governing politicians keep hinting this year’s deficit may be worse than assumed in the February budget. We’ll know for sure by the end of this month when the province reports publicly on the first quarter and updates its deficit projection.

In those February forecasts, the government was in line with private sector forecasts on oil and gas prices –albeit from late 2011 and early January of this year. But by February, it was clear even those forecasts were out of whack. In February, the very week that the Alberta government released Budget 2012 and predicted an average price of $3.00 (per gigajoule) natural gas, Calgary’s First Energy Capital Corp. cut its own estimate of gas to just $2.27.

The difference mattered then and now, as lower resources prices mean less revenue for provincial coffers and more red ink.

While the province at least hewed to private sector forecasts on oil and gas during its budget preparations, defensible if not overly cautious, the government deliberately ignored private sector forecasts on other matters.

For example, Budget 2012 forecast that Alberta’s economy would grow by 3.8 per cent in both 2012 and 2013. That was about one-fifth higher than private sector estimates which pegged Alberta GDP growth at 3.1 per cent and 3.2 per cent in 2012 and 2013 respectively.

Similarly, the government assumed real personal income growth would rise by 6.2 per cent in 2012 and six per cent in 2013. But the average of private sector forecasts pegged real growth much lower, at 4.5 per cent in 2012 and 4.7 per cent in 2013. Again, the government chose an artificially high number.

Perhaps the most glaring example of where the province chose optimistic assumptions was in corporate profits. Here, the province assumed growth in corporate profits of 11.8 per cent in 2012 and a whopping 17.5 per cent in 2013. The government forecasts were thus five times as optimistic for 2012 and almost three times as optimistic for 2013 compared to the private sector (which forecast growth of just 2.3 per and 6.2 per cent respectively).

In response to a recent report by myself and a colleague that noted such out-of-whack optimism and the rapid decline in Alberta’s net financial assets (we’re down by half in just five years), Finance Minister Doug Horner told one reporter that "It's great to have great hindsight, 20-20 vision in the rear-view mirror."

That response implies the government’s artificial sunshine on budget numbers is only clear now.

Wrong. It was obvious in February. All the above figures were published in the government’s own February budget. So the government knew the private sector estimates and deliberately chose optimistic figures anyway. It did so with income growth, corporate profits and Alberta’s GDP.

That wish-upon-a-revenue-star approach allowed the province to forecast a relatively small deficit this year. It also allowed the government to predict a surplus next year, this on the eve of an election.

History never repeats exactly. But in its revenue optimism, the most recent Alberta budget eerily resembles a much earlier set of figures produced by BC’s NDP on the other side of the Rocky Mountains.